2nd Official Dissented Over Inquiry Into Pequot

By WALT BOGDANICH

Published: December 5, 2006

Congressional investigators have found that a second official at the Securities and Exchange Commission expressed serious concerns about how the agency was conducting its inquiry into a prominent hedge fund, Pequot Capital Management.

The official, Eric Ribelin, an investigator at the commission, asked to be removed from the Pequot inquiry because of his serious misgivings about decisions being made on the case by senior S.E.C. officials, according to a government official who spoke on condition of anonymity because he is not authorized to discuss the matter.

Mr. Ribelin believed that the inquiry ''was not handled right,'' Senator Arlen Specter, the chairman of the Judiciary Committee, said in an interview. The investigator's criticism echoes some of the complaints lodged this year by the former S.E.C. lawyer who ran the investigation, Gary J. Aguirre.

''Something smells rotten here,'' Mr. Ribelin wrote in an e-mail message to an S.E.C. supervisor last year.

He is among those expected to testify today before Senator Specter's committee, which, together with the Senate Finance Committee, has been examining allegations by Mr. Aguirre that the agency prematurely halted its Pequot investigation because of outside political pressure.

Mr. Aguirre, who led the hedge fund investigation until he was fired last year, has told members of Congress that senior S.E.C. officials blocked him from taking testimony from John J. Mack, an influential Wall Street executive and friend of Pequot's founder, Arthur J. Samberg.

S.E.C. officials said they turned down Mr. Aguirre's request at that time because he had not made a strong enough case for taking Mr. Mack's testimony, records show. The S.E.C. took Mr. Mack's testimony about a year later, and formally closed the Pequot investigation last week without taking any enforcement action. Mr. Samberg and Mr. Mack have repeatedly denied any improper conduct.

Senator Specter, a Pennsylvania Republican, said he was interested in finding out why S.E.C. officials, who had previously written favorable evaluations of Mr. Aguirre's work, suddenly wrote a critical evaluation that covered the same time period.

Government officials said the S.E.C. supervisors never discussed the evaluation with Mr. Aguirre and then placed it in his employment file after he was fired on Sept. 1, 2005.

Just days before his firing, Mr. Aguirre was awarded a two-step merit pay increase.

According to a government official, Mr. Aguirre's direct supervisor, Robert Hanson, an S.E.C. branch chief, said the supplemental evaluation was written at the suggestion of Paul R. Berger, a former associate director of enforcement. Mr. Berger declined to discuss the evaluation yesterday, saying he could not comment on personnel matters.

Senate investigators have also been looking at circumstances surrounding Mr. Berger's decision to take a job at the law firm of Debevoise & Plimpton this year.

Debevoise was hired by Morgan Stanley's board to vet Mr. Mack before he was named to head the company in June 2005. As part of that vetting process, Mary Jo White, the former New York federal prosecutor now at Debevoise, did contact the S.E.C.'s director of enforcement, Linda Thomsen, about Mr. Mack, but the firm says it never suggested to anyone at the commission that the investigation be stopped.

Mr. Aguirre has told Congress that after a compliance officer at Morgan Stanley called the S.E.C. in June of 2005, inquiring whether Mr. Mack might face an enforcement action, Mr. Aguirre's Pequot investigation was essentially shut down.

Mr. Aguirre said that before answering the compliance officer, he consulted with his two superiors, Mr. Hanson and Mark Kreitman, an assistant director of enforcement. According to Mr. Aguirre, Mr. Kreitman favored telling Morgan Stanley that Mr. Mack was indeed a target, but first he informed his boss, Mr. Berger, by speakerphone.

With Mr. Aguirre listening in, Mr. Berger overruled Mr. Kreitman, saying in effect that the S.E.C. would most likely not file charges against Mr. Mack, and that nothing should be said to Morgan Stanley, Mr. Aguirre said.

Mr. Berger said yesterday that he had told Morgan Stanley ''that it was premature to say whether or not Mr. Mack had any exposure.''

Several months later, Mr. Berger said, an S.E.C. colleague who was interviewing at Debevoise offered to mention that Mr. Berger might have an interest in working there, too. Mr. Berger agreed.

In a statement yesterday, Debevoise's presiding partner, Martin Frederic Evans, said, ''Sometime in September 2005, well after our work for the Morgan Stanley board had concluded, we were told that Mr. Berger might have an interest in talking to Debevoise, but the firm did not contact Mr. Berger, nor did the firm hear from him till January 2006.''

Mr. Evans said that neither Mr. Mack nor the S.E.C. investigation were mentioned in the firm's employment discussions with Mr. Berger.

Once that contact began, Mr. Berger said yesterday, ''I recused myself from any matter with which the firm was involved, including the Pequot investigation.''

Mr. Aguirre has already provided Senate investigators with lengthy statements and dozens of contemporaneous e-mail exchanges he had with S.E.C. supervisors. He is also expected to testify at the hearing today, along with senior S.E.C. officials, including Ms. Thomsen and Mr. Berger.

The committee is also expected to question the agency's inspector general, Walter J. Stachnik, who initially concluded that the S.E.C. had done nothing wrong. But after the disclosure that Mr. Stachnik's office had not interviewed Mr. Aguirre before rendering its judgment, the inspector general reopened his investigation.

''These folks are going to be under oath, and I'm going to try to get to the bottom of it,'' Senator Specter said.

The senator said he would call for legislation requiring hedge funds to register with the S.E.C. if they manage pension fund investments or money from small investors.

Before the S.E.C. decided this year not to file any enforcement action against Pequot, the agency had been investigating a number of profitable trades by the hedge fund in advance of mergers or other market-moving news.

Mr. Aguirre began investigating Pequot soon after he started at the agency in September 2004.

''When you are inquiring into areas like this, it's very delicate and people are very reluctant to talk,'' Senator Specter said. ''These investigations are not easy and not totally predictable.''

The S.E.C. is also under review by the Government Accountability Office, the investigative arm of Congress. Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, asked for the review in September because he was growing concerned, he said, about whether the S.E.C. was ''faithfully adhering to its mission.''

The G.A.O. will also examine how well the commission monitors self-regulatory organizations -- like the New York Stock Exchange and NASD -- that refer cases to the commission for possible enforcement actions.